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Compliance costs small banks 3x more than large banks

By Rick Grant

If you’ve been looking around your neighborhood and wondering what’s different, there’s a good chance that it might just be the fact that there are fewer community banks. Smaller banks are being driven from the business, according to a column authored by David Nicklaus that appeared in the St. Louis Post-Dispatch. Nicklaus writes about the economy and how it impacts businesses in St. Louis.

He pointed out that while many have dismissed the claims by small banks that Dodd-Frank has affected them disproportionately, the fact is that the number of community banks has shrunk to fewer than 6,000 today from nearly 8,000 in 1995. Part of the reason is that compliance costs are significantly higher for smaller banks.

Nicklaus cited research from Michelle Neely, a St. Louis Fed economist, who has studied the size of the regulatory burden on American banks. According to Neely, compliance costs amount to 8.7 percent of non-interest expenses for banks with less than $100 million in assets, but just 2.9 percent for banks in the $1 billion to $10 billion range.

Compliance costs are increasing everywhere and I haven’t had a conversation with anyone in the industry that hasn’t touched upon the topic. That’s a fact of life in the new financial services business. This isn’t a piece advocating the elimination of all costly regulatory burden (well, maybe just the costly part).

But if the costs are disproportionately high for smaller banks at a time when larger banks are moving away from certain products, like mortgages and small business loans, this could have an overall negative impact on many communities around the country.